Fed's Dudley: Two key tapering tests not yet met

William C. Dudley, president and chief executive officer of the Federal Reserve Bank of New York.

The Federal Reserve still needs to push hard against threats to the U.S. economic recovery, and fiscal uncertainties in particular "loom very large right now," an influential Fed policymaker said on Monday.

New York Fed President William Dudley defended the U.S. central bank's shock decision last week not to trim its aggressive bond-buying, arguing in a speech that any changes to the quantitative easing program mush be based on the most recent measures of economic health.

A close ally of Fed Chairman Ben Bernanke, Dudley highlighted the drags from the sharp recent rise in longer-term interest rates, higher taxes and lower public spending adopted earlier this year, and questions over the U.S. debt limit and government funding as Congress meets this autumn.

Dudley also said the Fed could "wait a long time" to raise interest rates once the unemployment rate hits a 6.5 percent threshold.

The Federal Reserve is considering adopting a possible new reverse repurchase facility not to foreshadow a change in monetary policy but to help the U.S. central bank adjust policy when the time is right, and to get a better grip on overnight interest rates, Dudley also said.

"I want to dispel any misconceptions about why we are doing this testing," said Dudley, whose Fed branch is testing and would run the facility, talk of which surfaced in minutes of the Fed's July policy meeting.

"The introduction of this facility is not a precursor to a change in the stance of monetary policy," he said in a speech. "Instead, the goal of this new facility is to improve our control over overnight interest rates to aid us in the implementation of monetary policy."

U.S. labor productivity has slipped and the trend in monthly new job creation appears to have slowed, Atlanta Fed president Dennis Lockhart said on Monday, warning that this was a call to action to reverse a worrying trend.

"Is America losing its economic mojo? There is some evidence to the affirmative," Lockhart told a conference on creative leadership.

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